China continues its military exercises around Taiwan, but this had no impact on the markets except for gold (+0.7% to 1,787.61) maintaining a slight geopolitical risk premium.
Overview Sweet dreams
- Very quiet ahead of US CPI on Wednesday
- US Treasury Yields Fall and USD Falls Too
- The actions cancel out the initial gains; Nvidia weighs
- The curve inverts further; 2/10s now -46.0bps
- Upcoming: AU NAB Survey & Confidence, US NFIB
“Sweet dreams are made of this; Who am I to disagree; I travel the world and the seven seas; Everybody is looking for something”, Eurythmics 1983
A very quiet start to the week with few important news. China continues its military exercises around Taiwan, but this had no impact on the markets except for gold (+0.7% to 1,787.61) maintaining a slight geopolitical risk premium. Instead, markets reflected on Friday’s payrolls report, with a few other US banks announcing a 75 basis point hike in September. The markets of course got their first Friday with a price of 69 basis points, now slightly higher to 70 basis points. Regarding the level of US rates, markets are looking for a peak of 3.62% in March 2023, followed by 57 bps of declines in 2023. Yields have consolidated the important movements of the last week with 2-year yields down -1bp to 3.21% on larger moves. over 10 years from -7.7bp to 2.75%. This momentum of course means that the 2/10 curve has inverted again at -46.0 basis points, the most inverted in 20 years and continues to raise talk of recession risk (note that the biggest in modern times was -56 basis points in April 2000). Meanwhile, the USD edged lower with the DXY -0.2%, while stocks gave up earlier gains with the S&P500 -0.1% after being up around 1.0% at some time. A weak earnings report from Nvidia (-6.3%) was one of the catalysts for the reversal.
There were few significant data. A second tier report that has grabbed the headlines is the New York Fed’s survey of consumer expectations. . This survey reported a decline in inflation expectations over all time horizons with one year at 6.2% from 6.8%, three years at 3.2% from 3.6% and the five year is requested on an ad hoc basis at 2.3% of 2.8. %. The drivers appeared to be expectations of a sharp decline in gasoline and food price increases – likely reflecting the drop in oil prices seen to date. The shift in inflation expectations broadly supports the moves seen in implied inflation breakevens over the past few months with the 10-year breakeven at 2.48%, well below its highs of 3.04% in April. Note that another measure of inflation expectations will be released Friday in the University of Michigan Consumer Sentiment Survey, with the Fed keeping a close eye on 5-10 year expectations.
With strong payrolls on Friday, the focus is on equities and the possibility of sustaining the current rally. With this in mind, Nvidia’s weaker-than-expected earnings numbers (-6.3%) put pressure on semiconductor stocks and combined with technical data (the Nasdaq had retraced 38.2% of its losses since its peak in November) were the catalyst that saw S&P trading up 1.0% at one point, to close at -0.1%. Nvidia noted that fiscal revenue for the second quarter was about $6.7 billion, down from its previous projection of $8.1 billion. Demand for high-end graphics chips has weakened, with major gaming and PC companies reporting weaker prospects. The return of enthusiasm for meme stocks is also interesting in terms of financial conditions, with dogs like Bed Bath and Beyond (+39.8%), AMC (+8.4%) and Gamestop (+8, 6%) benefiting today from gains. Many analysts view the stock gains as a sign that financial conditions are still not tight enough (they have eased since the last FOMC meeting) and that the Fed still has a lot of work to do.
In FX, the USD gave up some of its Friday gain, with the DXY down around -0.2%. Either AUD (+1.1%) or NZD (+0.9%) were boosted yesterday, helped by better than expected Chinese trade numbers, as were most commodities. Geopolitical tensions had little impact even with China’s decision to expand its military drills around Taiwan, continuing training “under real wartime conditions”, as the People’s Liberation Army described it. . The EUR (+0.1%), GBP (+0.0%) and USD/Yen (-0.1%) were all little changed. My BNZ colleague Jason Wong noted in his desperate search to write about something today found an FT article that Norway is set to limit electricity exports in a blow for European energy supply. Norway’s hydroelectric lakes are low and there is political pressure to fill the reservoirs rather than pumping electricity for export to the UK, Germany, the Netherlands and Denmark. An export restriction here can only aggravate the evolving energy crisis in Europe, a crisis that seems to be intensifying as winter approaches. The story did not affect the market, with the euro flat on the day and European gas futures stabilizing lower.
- AU: NAB Survey and W-MI Consumer Confidence: No clues here. Price indicators from the NAB survey will remain in focus, having signaled high and growing price pressures in recent months. Consumer confidence has fallen for seven consecutive months to its lowest level since August 2020.
- NZ: Card spend: no consensus, previous month was 0.1% m/m.
- CH: Overall funding: potentially out anytime this week
- United States: NFIB, Productivity: The NFIB Small Business Survey is expected to be little changed at 89.5. Productivity estimates are also released for the second quarter, with nonfarm productivity estimated at -4.6% annualized, versus -7.5%.